Hey, I have two questions to ask about CFD's, hope I can get an answer as I've got the last time. I'm going to open an account with a brokerage and I will trade stocks, but CFD's look interesting. I won't touch them until I gain some experience, but I'd like to ask my questions now in order to get some info. 1-) I understand that there's a difference on the price (while stock price is 10.30, CFD price can be 10.34), there's a leverage and I pay interest if I keep the stock for more than one day. The question is, what if the stock price goes down by 3 percent while I'm on 1:2 leverage? If I sell it immediately, I'd lose 6 percent, that's ok, but if I decide to keep it for a few days, do I have to pay anything extra? 2-) It seems that there could be a conflict of interest if my brokerage isn't using an external pool to match my trades with other people's. Then they'd be the market maker and I'd be betting against them, right? In that case, would they able to close your account if you consistently make money? Given that it's 2016 and they're regulated, I don't think such a thing would happen, but I wondered. I know this question sounds naive, but please be honest. One more question, how would I learn about whether they're matching my CFD orders with other people's or they're acting as a market maker? Is that info classified? I want things to be as transparent as possible. EDIT : I found out that the brokerage I'm going to open an account with offers something called Direct Market Access for CFD's, but commissions are a little higher. Does that mean it's the thing I'm looking for? Thanks!
Here in the states they are called swaps. In my 20yrs in the market I have never touched them. In fact I dont know anybody that has touched swaps in my circles. Swaps work great if the stock goes up and you are long, but if it goes down, you get whacked really hard! I would avoid these until you have some really good experience with normal equities.
I'd echo Gil's comments. Trading in CFD's add another layer of risk. The only benefit you get is more leverage to play with stocks but the downside is higher risk if a trade moves against you. If I were looking to trade with leverage without using margin's I'd recommend learning how to play with options. You can buy long term calls with a delta around 70% that will pretty much follow the stock price and leverage 100's of shares with minimal outlay for more leverage.
